Facing a surging yen and mounting calls for action, Japan may finally decide that it can't afford to let its currency keep climbing.
Wednesday brought growing expectations that Japan's monetary authorities would do something to stem the yen's rise after it hit a fresh 15-year high against the dollar the day before. New government figures showed that the country's export growth lost momentum in July, in large part due to the strong yen.
Weaker shipments of consumer electronics, autos and other goods pose a major risk for Japan's export-driven recovery. With lackluster demand at home, the country has depended on high-growth countries like China to fuel the economy.
That expansion is now waning just as exporters face a new onslaught from the yen, which traded below 84 to the dollar this week. It weakened slightly on Wednesday amid speculation that Japan might intervene in the currency market for the first time since March 2004 to stem the rise.
But hopes for a quick counterpunch fizzled in the afternoon after Japanese leaders emerged from an emergency meeting with few hints of an immediate response. Finance Minister Yoshihiko Noda told reporters he did not discuss specific yen-targeted measures during the meeting with Prime Minister Naoto Kan.
Disappointed investors sent the Nikkei 225 stock index tumbling 1.7 percent to a new 16-month low of 8,845.39.
Earlier in the day, Noda said that the government must respond with "appropriate steps" when necessary.
An appreciating yen is toxic for exporters like Toyota Motor Corp. and Sony Corp. because it shrinks the value of repatriated profits and makes their products less competitive overseas.
Comments after the meeting suggest that the earliest action could come from the central bank when it meets on Sept. 6 for a two-day policy board meeting.
Under growing political pressure, the Bank of Japan is expected to ease monetary policy to try to weaken the yen. Analysts say the central bank will most likely decide to boost liquidity by expanding a short-term low-interest loan program for financial institutions.
"The BOJ doesn't want to do anything," said Christian Carrillo, head of Asia fixed-income strategy at Societe Generale in Tokyo. "It's really being dragged kicking and screaming to try to do something."
The finance ministry's latest figures showed that the value of exports in July climbed 23.5 percent from a year earlier to 5.98 trillion yen ($71 billion). Exports had expanded 27.7 percent in June and 32.1 percent in May.
The strong yen is responsible for much of the export slowdown and points to a "soft patch" for exports in the July-September quarter, said Kyohei Morita, chief economist at Barclays Capital Japan, in a note to clients.
"Even so, we expect exports to hold their ground as a trend," Morita said. "Export volume remains firm, and we expect the economic recovery in the US and China — Japan's key export destinations — to remain intact despite some deceleration."
Japan's economy grew at an annualized pace of just 0.4 percent in the April-June quarter, losing its place to China as the world's No. 2 economy. Prime Minister Naoto Kan is expected to craft a new stimulus package and has asked ministry heads for ideas.
Shipments to Asia, which account for more than half of the country's exports, rose 23.8 percent, slower than previous months.
The reading was offset in part by stronger demand from the U.S. and Europe. Exports to the U.S. rose 25.9 percent, while those to the European Union climbed 13.3 percent.
Demand for machinery jumped more than 53 percent, and motor vehicle exports rose 27.1 percent.
Imports in July rose 15.7 percent to 5.18 trillion yen ($61.5 billion), resulting in a trade surplus of 804.2 billion yen ($9.5 billion).
The head of Japan's biggest business lobby urged the government to take decisive steps, including currency intervention.
"A stable foreign exchange market is crucial for companies," said Hiromasa Yonekura, chairman of the Nippon Keidanren, according to Kyodo news agency. "The yen has been rising at a fast pace that is beyond the expectations of the business world."
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